Academic journal article Journal of Accountancy

Temporary Regs Change Tips Bond Premium Method

Academic journal article Journal of Accountancy

Temporary Regs Change Tips Bond Premium Method

Article excerpt

The IRS and Treasury issued proposed and temporary regulations (REG- 130777-11; T.D. 9561) requiring the use of the coupon interest method to amortize a premium in excess of a de minimis amount related to Treasury inflation-protected securities (TIPS). The regulations apply to TIPS issued on or after April 8, 2011.

TIPS are U.S. Treasury securities with an inflation/deflation-adjusted principal amount used to compute interest payments and the final payment at maturity. Under prior regulations, taxpayers purchasing TIPS at par or at a de minimis premium or discount were required to recognize income using the coupon bond method of Regs. Sec. 1.1275-7(d), while taxpayers purchasing TIPS with more than a de minimis discount were required to use the discount bond method of Regs. Sec. 1.1275-7(e). Historically, TIPS had not been issued at more than a de minimis amount of premium, so the existing regulations did not address that contingency. But in Notice 2011-21 issued April 8, 2011, to advise of the impending rule change, the IRS said Treasury anticipated doing so "due to recent financial conditions." An amount is de minimis if it is no more than 0.25% of the bond's stated principal multiplied by the bond's term. The new regulations now require the coupon bond method for TIPS purchased at a premium exceeding a de minimis amount. …

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